A306 Test 2 pt.1

The Eye Clinic of Dr. Christensen is investing in some equipment to perform corrective eye surgery. It is expected that the equipment purchase will generate an internal rate of return of 24%. This equipment was chosen over equipment to perform cataract eye surgery. Thus, the internal rate of return of the cataract eye surgery equipment must have been

less than the internal rate of return of the corrective eye surgery equipment

The term capital budgeting is used to describe how managers plan significant investments in projects that have ______ implications.

long-term

Differential costs and benefits that should be considered in a decision ______

may be qualitative and quantitative

One dollar today is worth ______ a dollar a year from now.

more than

When making a decision whether to keep an existing an existing piece of ailment or replace it, which of the following is considered a sunk cost?

neither the original purchase price or annual depreciation expense

Capital budgeting methods that focus on cash flows rather than incremental operating income are

net present value payback internal rate of return

Which of the following should not be included in the analysis when making a decision?

non-differential future cost, and sunk costs

When considering accepting a special order, ______.

normal sales must not be affected there must be idle capacity

Select the capital budgeting approaches that use discounted cash flows.

-Internal rate of return method -Net present value method

Which of the following statements are true?

-The net present value method automatically provides for return of the original investment. -A project with a positive NPV will recover the original cost of the investment plus sufficient cash inflows to compensate for tying up funds.

Which of the following statements are true?

-When the net present value method is used, the discount rate equals the hurdle rate. -The cost of capital may be used to screen out undesirable projects. -When using the internal rate of return method, the cost of capital is used as the hurdle rate.

Capital budgeting decisions include

-determining which equipment to purchase among available alternatives -deciding to replace old equipment -acquiring a new facility to increase capacity -purchasing new equipment to reduce cost -choosing to lease or buy new equipment

The payback method

-does not consider the time value of money -ignores all cash flows that occur after the payback period -is not a true measure of investment profitability

The simple rate of return

-fluctuates from year to year along with fluctuations in revenue and expense -ignores the time value of money

Typical capital budgeting cash outflows include

-initial equipment investments -installation costs working capital invested

Capital budgeting decisions

-involve an immediate cash outlay in order to obtain a future return -require a great deal of analysis prior to acceptance

Conducting a postaudit

-provides an opportunity to reinforce and possibly expand successful projects -provides an opportunity to cut losses on floundering projects -flags any manager's attempts to inflate benefits or downplay costs in a project proposal

The two broad categories into which capital budgeting decisions fall are __________ decisions and __________ decisions

-screening -preference

The net present value of a project is __________

-used in determining whether or not a project is an acceptable capital investment -the difference between the present value of cash inflows and present value of cash outflows for a project

A postaudit is a valuable process becaus

actual values can be used to determine if the project is performing as expected

Isolating relevant costs is desirable because ______.

all information needed for the total cost approach is rarely available critical information may be overlooked with the total cost approach irrelevant costs may be used incorrectly in the analysis

Potential advantages of dropping a product line or other segment include

an overall increase in net operating income, avoiding more fixed costs that the company loses in contribution margin

The simple rate of return equals the

annual incremental net operating income ÷ initial investment

When a project with a negative NPV has significant intangible benefits, the Blank

annual intangible benefit necessary to make the investment worthwhile should be calculated

The net present value method assumes that all cash flow other than the initial investment occur ______ the period

at the end of

A cost that can be eliminated in whole or in part by choosing one alternative over another is an

avoidable

When computing the simple rate of return, the annual incremental net operating income in the numerator should ______ the investment's depreciation charges.

be reduced by

To screen out undesirable investments, ______ use(s) the cost of capital.

both the net present value and internal rate of return methods

Another term for the minimum required rate of return is the cost of

capital

How managers plan significant investments in projects that have long term implications such as purchasing new equipment or introducing new products is called

capital budgeting

A postaudit involves

checking whether expected results are actually realized

A limited resource of some type that restricts the company's ability to satisfy demand is a(n) ______.

constraint

Anything that prevents you from getting more of what you want is a(n)_________ .

constraint

A business segment should only be dropped if a company can avoid more in fixed costs than it gives up in ______

contribution margin

If some products must be cut back because of a constraint, produce the products with the highest ______.

contribution margin per unit of constrained resource

Typical capital budgeting decisions include ______ decisions.

cost reduction lease or buy equipment selection

The first step in decision making is to _______

define the alternative

Net present value is the

difference between the present value of a project's cash inflows and the present value of the project's cash outflows

A future cost that is not the same between any two alternatives is known as an _____ incremental or avoidable cost

differential

When considering decision alternatives, only relevant costs are included ______ when using the cost approach.

differential

Focusing on future costs and benefits that are not the same between the choices is __________

differential analysis

The key to effective decision making is _______

differential analysis

Suppose a project with a negative net present value would provide intangible benefits. To estimate the annual value of intangible benefits needed to accept the project, ______ the negative net present value excluding intangible benefits by the______

divide, present value factor for an annuity

Because of the time value of money, projects that promise ______ returns are preferable to those that promise the opposite.

earlier

When a capital investment decision is being made between two or more alternatives, the project with the shortest payback period is always the most desirable investment.

false

When a company is involved in more than one activity in the entire value chain, it is horizontally integrated.

false

opportunity costs are not found in accounting records because they are not relevant to decisions

false

The basic premise of the payback method is the ______, the more desirable the investment.

faster the cost of the investment is recovered

A business segment should only be dropped if a company can save more in ______ costs than it loses in contribution margin.

fixed

When making a volume-trade off decision, managers should ignore ______.

fixed costs

Irrelevant costs include ________

future costs that do not differ between alternatives, sunk costs

The rule used when comparing competing investments is the ______ the project profitability index, the more desirable the project.

higher

To maximize total contribution margin when a constrained resource exists, produce the products with the ______.

highest contribution margin per unit of the constrained resource

To determine if a project is acceptable compare the internal rate of return to the company's

hurdle rate

Synonyms for differential costs include _____ cost

incremental, avoidable

when making a decision to either buy a movie ticket or rent a DVD, the cost of the movie ticket is an example of an ______cost

incremental, avoidable

Typical capital budgeting cash outflows include

installation costs initial equipment investments working capital invested

Investment required ÷ Annual net cash inflow is the formula to find the factor that needed to calculate the

internal rate of return

In an equipment capital budgeting decision, recovering the original investment means that the

investment has generated enough cash inflows to completely cover the cost of the equipment

When net cash inflow is the same every year, the equation used to calculate the factor of the internal rate of return is

investment required ÷ annual net cash inflow

Future costs and benefits that do not differ between alternatives are ____ costs to the decision making process

irrelevant

Future costs and benefits that do not differ between alternatives are ______ costs to the decision-making process.

irrelevant

When deciding whether to drive your car or take a train to a destination, the costs for your car insurance and drivers license are _______ costs

irrelevant

When deciding whether to fly or take the train on a trip, the cost of putting your pet in a boarding facility while you are away is an _______ cost

irrelevant

The internal rate of return

is the discount rate that makes NPV equal zero for a project

In order to prevent confusion and keep attention focused on critical information, it is desirable to ______

isolate relevant costs from irrelevant costs

In order to prevent confusion and keep attention focused on critical information, it is desirable to ______.

isolate relevant costs from irrelevant costs

A capital investment project's payback period is the

length of time it takes for the project to recover its initial cost from the net cash inflows generated

Costs and benefits that always differ between alternative are ______ costs and benefits

relevant

When making a decision only _____ costs and benefit should to be included in the analysis

relevant

When making a decision only ______ costs and benefits should be included in the analysis

relevant

When planning a trip and deciding to drive your car or take the train, gasoline is a(n) ______ cost.

relevant

When computing the simple rate of return, the initial investment should be reduced by any ______value realized from the sale of the old equipment.

salvage

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

salvage value alternative uses for the equipment

A company is considering buying a component part that they currently make. Items related to the equipment being used to make the component that are relevant to this decision include ______.

salvage value, alternative uses for the equipment

The cost of capital serves as a ______ tool

screening

Little Tots Gym has a required rate of return of 13%. The gym is considering the purchase of $12,500 of new equipment. The internal rate of return on the project has been calculated to be 11%. This project

should be rejected

When making a decision, qualitative differences between alternatives _____ be ignored.

should not

The capital budgeting methods that focus on incremental operating income rather than cash flows is

simple rate of return

Determining whether to carry out an activity in the value chain internally or use a supplier is a ______ decision.

sourcing

Whether to perform various organization activities such as payroll and accounting internally or use an external provider is a ______ decision.

sourcing

A one-time order that is not considered part of the company's normal ongoing business is called a Blank______ order.

special

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) _______ decision

special order

A one-time sale that is not considered part of the company's normal ongoing business is referred to as a(n) _________ decision.

special order

What type of cost is never relevant and should be disregarded when making decisions?

sunk

What type of cost is never relevant and should be disregarded when making decision?

sunk costs

Which of the following should not be included in the analysis when making a decision?

sunk costs, non-differential future costs

When making a decision, only relevant items are included in the analysis of the alternatives when using ______

the differential cost approach only

When using the internal rate of return method to rank competing investment projects

the higher the internal rate of return, the more desirable the project

If a company is using a resource that could be used for some other purpose, the opportunity cost of that resource is ______.

the profit from the best alternative use of the resource

The internal rate of return is

the rate of return of an investment project over its useful life

When making a decision irrelevant items are included in the analysis of both alternatives when using ______

the total cost approach only

A set of activities ranging from development to production to after-sales service is called ______.

the value chain

When considering decision alternatives, both relevant and irrelevant costs are included when using the _____ cost approach

total

When a constraint exists, companies need to focus on maximizing ______.

total contribution margin

The net present value of one project can only be directly compare to the net present value of another project if the initial investments are equal.

true

When using the simple rate of return method, a project that does not have constant incremental revenues and expenses may look desirable in some years and undesirable in others. True false question.

true

Every decision has at least ____ alternatives

two

Activities ranging from development to production to after-sales service are called a(n) __________

value chain

Which term refers to a company that is involved in more than one activity in the value chain?

vertical integration

Which term refers to a company that is involved in more than one activity in the value chain?

vertically integrated

When demand for products exceeds the production capacity, a ______ decision must be made.

volume trade-off

Water World is planning to build a new attraction at its water park. A new wave pool has a project profitability index of 1.09, and a new water slide has a profitability index of 1.14. The best choice for Water World is the

water slide

A special order should be accepted ______.

when the incremental revenue from the special order exceeds the incremental costs of the order

Current assets minus current liabilities is called

working capital

When a resource, such as space in the factory, has no alternative use, its opportunity cost is ______.

zero

A project has an acceptable rate of return, if the net present value is

zero or above

View Perfect is considering an investment in a new line of windows. The project is expected to last 10 years. If the factor of the internal rate of return is 5.889, the internal rate of return is

11%

The factor of the internal rate of return is 5.033 for a project lasting 7 years. The internal rate of return is

9

What assumption underlies net present value analysis?

All cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

Which of the following is NOT a typical capital budgeting cash outflow?

Cost reductions

Which of the following capital budgeting decision tools focuses on net operating income rather than cash flows?

Simple rate of return

Working capital

often increases when a company takes on a new project

When making a preference decision, comparing the net present value of one project to the net present value of another project can

only be done if the initial investments are equal

The potential benefit given up when selecting one alternative one another is an _______ cost

opportunity

The more quickly the cost of an investment can be recovered, the more desirable the investment is the basic premise of the _________method.

payback

The length of time that it takes for a project to recover its initial cost from the net cash inflows that it generates is the ________________

payback period

The original investment in a capital project has been recovered if the net present value is

positive or zero

The two broad categories into which capital budgeting decisions fall are ______ and ______decisions.

preference screening

The term discounting cash flows refers to the process of calculating the ______ value of those cash flows.

present

The term discounting cash flows refers to the process of calculating the______ value of those cash flows.

present